The underlying investment value in gold is determined largely by the
degree of caution with which the investor perceives the economy and the
polity; and the demand-supply equation.
Gold, with a traditionally well accepted attribute of being
seen as a "natural currency", has transcended historic and political
barriers, and still continues to be a sporadic competitor to the
dominant currency, time and again. In that context, the Indian tradition
of accumulating gold and creating a legacy over generations is a means
of not just saving and transferring wealth, but is also a learning from
the historic memory to save for the "tough times".
It is also pertinent to note that while equity and debt have a
cash-flow associated with them (in the form of dividends and interest),
gold as an asset class, has none. However, it is an asset class that is
know and acceptable to a holder of almost any currency. In that sense,
gold as an asset class is held largely for the purpose of hedging.
Consequently, the outlook on gold prices is largely in inverse
relationship with the larger economic and political mood. The high
political and economic uncertainties of the last decade may be a
case-point here.
The 16.26 per cent CAGR run-up in the gold prices since 2000 has
largely been attributable to the surfeit liquidity in the early part of
the decade, while in the latter half, the turbulent economic conditions
post the sub-prime crisis, continued to contribute to the gold rally.
The optimistic outlook on gold continues to remain unchanged for
many reasons. The geopolitical climate remains volatile. The complexity
surrounding the sovereign debt solvency in the P.I.I.G.S nations, too,
has caused increasing jitters to the financial markets. And, the
likelihood of renewed slowdown (and also perhaps recession) in the US
economy, is also driving up the global risk perception.
This expansion of potential risk in the environment may be
reducing the global risk-appetite. Consequently, there has been an
increase in allocation to 'gold' by Central bankers, institutional
investors and retailers, alike, who are seeking to protect their value.
To boot, in such circumstances, were the troubled economies to
resort to monetary expansion to wriggle their way out of their debt
problems, the resultant erosion in money-value may also spike up prices
in gold.
From that stand point, a prudent allocation in the gold asset
class, based on one's own investment plan and objective, gains
importance. The gold asset may play the stabilising role for the
portfolio in a deteriorating equity and/or debt market conditions; and
may also provide growth opportunity in an otherwise stable environment.
This will ensure that at least one of the three components of the
financial portfolio: debt, equity and Gold ETF; may be providing the
growth thrust to the overall corpus.
In that backdrop, the investor allocation to gold ETF may look to
be within the broad range of around 5-25 per cent of the total corpus.
Though this is in no way axiomatic, and is rather dependent on
individual's own requirements and preferences.
